Prediction Markets and the 2024 Presidential Election
- By: Jake Stoetzner
- Last Updated: 2024-10-17
Overview
Prediction markets are a type of exchange where you can buy and sell contracts that pay out based on the outcome of a future event.
“Shares in event outcomes are always priced between $0.00 and $1.00 USDC, and every pair of event outcomes (i.e. each pair of”YES” + “NO” shares) is fully collateralized by $1.00 USDC. The shares representing the correct, final outcome are paid out $1.00 USDC each upon market resolution. Unlike sportsbooks, you are not betting against “the house” – the counterparty to each trade is another user.” See What is Polymarket? - Polymarket Learn - Link - DB.
The markets are relatively new and lightly regulated.
Three of the largest markets currently are
The outcome of the 2024 Presidential Election is an event that is unsuprisingly attracting a lot of attention. As of 2024-10-17, the price for the event on each of the 3 markets is
| Trump | Harris | |
|---|---|---|
| Polymarket | 62.3 | 37.8 |
| PredictIt | 53 | 48 |
| Kalshi | 56 | 44 |
Interactive Brokers also recently launched a prediction market that covers the Presidential Election.
A recent price increase (implying an increase in the probability that Trump will win the election) has made social media question the reasoning behind the spike. See Thread by @Domahhhh - Link.
Over the past month on Polymarket, Harris went from a high of 52% to her current low of 37.8%. The moves in other markets have been less pronounced; from 58% to 48% on PredictIt and from 51% to 44% on Kalshi.
Some believe that a single individual or group of individuals is behind the large spike in volume and increase in price of a Trump win. See Thread by @fozzydiablo - Link.
A snapshot of the top 10 holders on Polymarket shows almost a 4:1 disparity between yes and no regarding whether Trump would win the election. The total shares for the “Yes” holders is 50,858,305, and the total shares for the “No” holders is 13,412,196.
Assuming that there is some type of focused effort to move prices on the prediction markets, it’s interesting to speculate as to “why” an individual or small group of individuals would be trying to move the market.
Hedge the Outcome
“Yes” holders have business interests that would be adversely affected by a Trump win, and are attempting to offset their expected losses. See What We Know About the Mystery Trader Betting Big on a Trump Win - Newsweek - Link - DB.
Profit
Rajiv Sethi pointed out that the large buyer “Freddi9999” is setting limit buy orders just above the best bid and thereby setting the floor for traders looking to sell the “Yes” contract. This raises the price over time. As of this post, Freddi9999 is up north of $2 million based on the account’s activity on Polymarket.
Arbitrage
Traders could be arbitraging the event between markets. One example would be:
- Buy the Yes on “Harris” at $0.378 on Polymarket
- Buy the Yes on “Trump” at $0.53 on PredictIt
- Total cost is $0.908 for a return of $1.00 per contract
- If Harris wins, you win $1.00 on Polymarket less your $0.378 original cost and lose the $0.53 on PredictIt
- If Trump wins, you win $1.00 on PredictIt less your $0.53 original cost and lose the $0.378 on Polymarket
- This is a guaranteed “win” of $0.092 per contract for a $0.908 outlay.
- This is an ROI of 10.13% over 19 pays or a 538.38% annualized return
Arbitrage is a possible explanation for the large price movements although I have yet to see any evidence that equivalent volume is traded across the 3 main markets.
Other (less Probable) Reasons
Stupidity or ignorance on the part of market participants. Making Harris appear to be the underdog to drive new voters. Making Trump appear that he has a landslide win to suppress his base. Aliens. You get the picture. All of these explanations could be true (okay, maybe not the alien one) but they are a lot less probable.